Connecticut Law Revision Commission

Consumer Law Study Committee

Possible legislation - based on RISFA - for parallel foreclosure rules for nonpurchase money loans under $50,000 secured by consumer goods

Based on RISFA foreclosure section 36a-785

December 27, 2001

 

Foreclosure. (a) Taking possession. This section applies to consumer goods that are subject to a nonpurchase money security interest that secures a consumer loan contract the original principal amount of which is fifty thousand dollars or less. When the owner of the consumer goods is in default in the payment of any sum due under the consumer loan contract, or in the performance of any other condition which the contract requires the owner to perform, or in the performance of any promise, the breach of which is by the contract expressly made a ground for the taking of the goods, the holder of the contract may take possession thereof. Unless the goods can be taken without breach of the peace, they shall be taken by legal process, but nothing herein contained shall be construed to authorize a violation of the criminal law. In the case of taking of possession of any motor vehicle without the knowledge of the owner, the local police department shall be notified of such taking of possession immediately thereafter. In the absence of a local police department or if the local police department cannot be reached for notification, the state police shall be promptly notified of such taking of possession.

Drafter’s comment – This provision is analogous to Article 9, section 9-609 (PA 01-132, section 106), which allows a secured party to take possession of collateral on default. Neither this provision nor Article 9 authorizes taking of possession if accompanied by a breach of the peace. This section would apply the RISFA rule concerning notification of the police if a motor vehicle is taken without the owner’s knowledge.

(b) Notice of intention to take possession. Not less than ten days prior to the taking, the holder of such contract, if the holder so desires, may serve upon the owner, personally or by registered or certified mail, a notice of intention to take the goods on account of the default. The notice shall state the default and the period at the end of which such goods will be taken, and shall briefly and clearly state what the owner’s rights under this subsection will be in case such goods are taken. If the notice is so served and the owner does not perform the conditions and provisions as to which the owner is in default before the day set for taking, the holder of the contract may take the goods and hold them subject to the provisions of subsections (d), (e), (f), (g) and (h) of this section regarding sale, but without any right of redemption.

Drafter’s comment – Consumer rights under the RISFA provision are superior to those under Article 9 in part because RISFA provides a right to cure and reinstate the contract. The primary significance of subsection (b) is that it provides a mechanism for the creditor to cut off that additional consumer right to cure and reinstate. From the consumer’s perspective, such a cut off provision appears to be a reasonable bargain for obtaining that underlying right.

More specifically, this section allows the holder of the security to serve an optional "notice of intention to take possession" at least 10 days prior to taking possession. Service of that optional notice terminates the owner’s right under subsection (c) to cure the default and reinstate the defaulted contract after the actual taking. On its face, that rule appears to be more restrictive of consumer rights than the Article 9 provision since there is no Article 9 provision by which a creditor can by notice similarly terminate the right of redemption. A closer analysis shows that the RISFA provisions are more consumer protective. That is so because the rights of redemption under RISFA include the right to cure and reinstate the defaulted contract and thereby regain possession of the collateral, while the right to redeem taken collateral under Article 9 is generally conditioned on payment of the full accelerated contract balance due, plus costs of taking possession and storage. If the optional "notice of intention to repossess" is not given under RISFA, the consumer has the right to cure the default, reinstate the defaulted contract, and thereby regain possession of the repossessed collateral (a RISFA right that does not have an Article 9 counterpart). If the optional "notice of intention to repossess" is properly given under RISFA, the consumer retains the Article 9 right to regain possession of the repossessed collateral by paying the full accelerated contract balance due, plus costs of repossession and storage.

Under Article 9, section 9-623 (PA 01-132, section 120), a debtor may redeem at any time before disposition, or contract for disposition, of the collateral under section 9-610 (PA 01-132, section 107), or acceptance of the collateral as satisfaction of the debt under section 9-622 (PA 01-132, section 119). Article 9 also requires a section 9-611 (PA 01-132, section 108) post-default notification before disposition that must be reasonable in time and manner and section 9-612 (PA 01-132, section 109) states that a post-default notification of at least 10 days before the earliest intended disposition is reasonable in a nonconsumer transaction. This means that under Article 9, the secured party can give as little as 10 days post-default notice of the earliest intended disposition date, and dispose of the property immediately after the 10 days. In other words, under Article 9, the right to redeem can be terminated more rapidly than under RISFA (since RISFA generally requires the repossessed collateral to be held for at least 15 days prior to disposition – see Section 36a-785(d). )

 

(c) Redemption. If the holder of the contract does not give the notice of intention to take possession, described in subsection (b), the holder shall retain the goods for fifteen days after the taking within the state in which they were located when taken. During such period the owner, upon payment or tender of the unaccelerated amount due under such contract at the time of taking and interest, or upon performance or tender of performance of such other condition as may be named in such contract as precedent to the owner’s continued possession of the goods, or upon performance or tender of performance of any other promise for the breach of which the goods were taken, and upon payment of the actual and reasonable expenses of any taking and storing, may redeem the goods and become entitled to take possession of them and to continue in the performance of the contract as if no default had occurred. The holder of the contract shall within three days of the taking of possession for default furnish or mail, by registered or certified mail, to the last known address of the owner a written statement that states the unaccelerated sum due under the contract and the actual and reasonable expense of any taking and storing. For failure to furnish or mail the statement as required by this section, the holder of the contract shall forfeit the right to claim payment for the actual and reasonable expenses of taking and storage, and also shall be liable for the actual damages suffered because of such failure. If such goods are perishable so that retention for fifteen days as herein prescribed would result in their destruction or substantial injury, the provisions of this subsection shall not apply and the holder of the contract may sell the goods immediately upon such taking.

Drafter’s comment – this RISFA based redemption provision would give owners of the secured consumer goods the right to cure by payment of the unaccelerated amount due unless the optional pre-possession notice was given. Redemption under Article 9 (if the option pre-possession notice was given) may require payment of the accelerated amount. Article 9, section 9-623 (PA 01-132, section 120).


(d) Compulsory sale. If the owner does not redeem the goods within fifteen days after the holder of the contract has taken possession, the holder of the contract shall sell the goods at public or private sale which sale may be held not less than fifteen days and shall be held not more than one hundred eighty days after the taking. When the holder of the contract takes possession by legal process, and an answer is interposed, the holder of the contract may, at the holder’s election, hold such taken goods for a period not to exceed thirty days after the entry of final judgment by a court of competent jurisdiction entitling the holder of the contract to possession of such goods before holding such sale. The holder of the contract shall give the owner not less than ten days' written notice of the time and place of any public sale, or the time after which any private sale or other intended disposition is to be made, either personally or by registered mail or by certified mail receipted for on mailing directed to the owner at the owner’s last-known place of business or residence. The holder of the contract may bid for the goods at any public sale. The proceeds of the sale shall be considered to be either the amount paid for the goods at such sale or the fair cash retail market value of the goods at the time of taking of possession, whichever is the greater, except as otherwise provided in subsection (g) of this section.

Drafter’s comment – this provision requires that goods be sold on possession. In contrast, Article 9, subsection (e) of section 9-620 (PA 01-132, section 17) mandates disposition in a consumer goods transaction by sale (under section 9-610 (PA 01-132, section 107)) only if 60% of the cash price, if purchase-money, or 60% of the obligation, if non-purchase-money, has been paid. Otherwise, section 9-620 would allow acceptance of the consumer goods in full satisfaction of the debt, but subsection (g) would still preclude acceptance of the goods in partial satisfaction. This subsection also requires that the debtor be credited with the fair cash retail market value of the goods sold if that is greater than the actual sale price. See (g) below. This is the primary consumer benefit of this draft.


(e) Proceeds of sale. Proceeds of the sale shall be applied (1) to the payment of the actual and reasonable expenses thereof, (2) to the payment of the actual and reasonable expenses of any taking and storing of the goods, (3) to the satisfaction of the balance due under the contract. Within thirty days of the sale, the holder of the contract shall give the owner a written statement itemizing the disposition of the proceeds. Any sum remaining after the satisfaction of such claims shall be paid to the owner or any obligor under the secured consumer loan contract or any encumbrancer or lienholder entitled to such payment, as applicable.

Drafter’s comment – See Article 9, section 9-615 and 9-616 (PA 01-132, sections 112 and 113).


(f) Deficiency on sale. Notwithstanding that the proceeds of the sale are not sufficient to defray the actual and reasonable expenses thereof, and also such actual and reasonable expenses of any taking and storing of such goods and the balance due under the contract, the holder of the contract may not recover the deficiency from the owner or any obligor under the secured consumer loan contract or any surety or guarantor therefor, or from any one who has succeeded to the obligations of the owner, obligor, surety, or guarantor, except as provided in subsection (g) of this section.

Drafter’s comment – See Article 9, section 9-615 (PA 01-132, section 112). Unlike Article 9, these "RISFA" provisions require that the debtor be credited with a "fair cash retail market value" for the goods sold if the actual proceeds of the sale are less.


(g) Fair market value. If the goods taken consist of a motor vehicle and the original principal amount of the consumer loan contract secured thereby was more than two thousand dollars, the prima facie fair market value of such motor vehicle for purposes of this section shall be calculated by adding together the average trade-in value for that motor vehicle and the average retail value for that motor vehicle and dividing that sum by two. Such average trade-in value and average retail value shall be determined by the values as stated in the National Automobile Dealers Association Used Car Guide, Eastern Edition, as of the date of taking of possession. If the goods taken consist of a boat and the original principal amount of the consumer loan contract secured thereby was more than two thousand dollars, the prima facie fair market value of such boat for purposes of this section shall be calculated by adding together the average trade-in value for that boat and the average retail value for that boat and dividing that sum by two. Such average trade-in value and average retail value shall be determined by the values as stated in the National Automobile Dealers Association Appraisal Guide for Boats, Eastern Edition, as of the date of taking of possession. In the event that the value of such motor vehicle or boat is not stated in such publication, then the fair market value at retail minus the reasonable costs of sale shall be determined by the court. The prima facie evidence of fair market value of such motor vehicle or boat so determined may be rebutted only by direct in-court testimony. If such value of the motor vehicle or boat is less than the balance due under the contract, plus the actual and reasonable expenses of the taking of possession, the holder of the contract may recover from the owner or any obligor under the secured consumer loan contract or any surety or guarantor therefor, or from anyone who has succeeded to the obligations of the owner, any obligor, surety, or guarantor, as a deficiency, the amount by which such liability exceeds such fair market value, as defined in this subsection. If the actual sale price received by the holder exceeds such fair market value, as defined in this subsection, the actual sale price shall govern.

Drafter’s comment – This section sets out the mechanism for the primary RISFA consumer protection against an unreasonable deficiency. The consumer liability for a deficiency must first credit the consumer with the fair cash retail market value of the goods as determined by this section, notwithstanding their actual sale price for less. If the goods actually sell for more, of course, the actual resale price governs.


(h) Election of remedies. After the holder takes possession as provided in subsection (a), or if the holder obtains a prejudgment remedy against the goods under chapter 903a, the owner or anyone who has succeeded to the owner’s obligations shall not be liable for any balance due, except to the extent permitted by subsection (g) of this section. The holder may seek a monetary judgment on the contract against the owner or any obligor under the secured consumer loan contract or any surety or guarantor therefor, or from anyone who has succeeded to the obligations of the owner, any obligor, surety, or guarantor, unless possession of the goods has been taken, with or without judicial process. Goods secured under the contract shall not be executed upon to satisfy such judgment. When such judgment becomes final, the holder's security interest in the goods shall be extinguished.

Drafter’s comment – This section limits the holder to his rights under this section if he moves to take the property rather than sue for money damages under the contract. Under Article 9, section 9-601 (PA 01-132, section 98) rights are cumulative. As drafted, the election of remedy rules of RISFA would govern contracts subject to this draft.

(i) Recovery of part payments. If the holder of the contract fails to comply with the provisions of subsections (c), (d), (e), (f), (g) and (h), after taking the goods, the owner may recover from the holder of the contract the owner’s actual damages, if any, and in no event less than one-fourth of the sum of all payments which have been made under the contract.

Drafter’s comment – See Article 9, section 9-625 (PA 01-132, section 122). Note that subsection (c) provides statutory damages in consumer-goods transactions. It may be appropriate to further coordinate these provisions.


(j) Waiver of statutory protection. No act or agreement of the owner before or at the time of the making of a consumer loan contract that is subject to this section nor any agreement or statement by the owner in such contract shall constitute a valid waiver of the provisions of subsections (c), (d), (e), (f), (g), (h) and (i).

Drafter’s comment – This anti-waiver provision is self-explanatory.

(k) Loss. Prior to any taking of consumer goods pursuant to this section by the holder of the consumer loan contract, the risk of injury and loss shall rest upon the owner of such consumer goods.

Drafter’s comment – This parallel’s RISFA provision at section 36a-785(k). See also Section 17(b) of public act 01-132 (Section 42a-9-207(b)).

(l) Definitions. As used in this section , "consumer goods" means consumer goods as defined in subsection (a)(23) of section 42a-9-102, as amended by section 2 of public act 01-132, and "consumer loan contract" means a loan contract entered into primarily for personal, family or household purposes.

Drafter’s comment – cross-references to the Article 9 definition of consumer goods.

(m) Applicability of Uniform Commercial Code. A transaction subject to this section is also subject to the Uniform Commercial Code, title 42a, but in case of any conflict or inconsistency the provisions of this section control.

Drafter’s comment – parallel’s RISFA provision at section 36a-770. This rule is consistent with Section 42a-9-201.

(n) Scope. This section does not apply to a repossession or other matter governed by section 36a-785.

Drafter’s comment – This provision addresses the fact that small loan lenders statutes expressly invoke section 36a-785. See last sentence of section 36a-568. This draft retains the status quo for any loans under the small loans statute that are already expressly governed under the RISFA repossession statute. Small loan lenders are highly regulated and those loans already enjoy RISFA protections. Retaining the status quo avoids unnecessarily raising issues with respect to the small loan lender statutes and regulations.